Sale of Personal Residence - Rented for 2 years

[BCinSC]

Client sold home that was rented for a couple of years. Client meets the 2 of 5 years exclusion requirement. Sold home for a sizeable loss. I was expecting the depreciation taken during the rental period to be recaptured but don't find that ATX is showing any recapture. The loss is not showing on Sch D but nowhere do I see the depreciation recapture. Fatigue has set in... any clarification is appreciated!

[Lion EA]

Can't exclude gain up to amount of depreciation, but you don't have any gain.

[Pacun]

You need to find out if the loss was personal or business.

Scenario 1.-

Let's say that I purchased a house in 2005 for $500K and lived there until Dec 31, 2009. I start renting the house on Jan 1, 2010 and the FMV of the house was only $275K. I rented the house in 2010 and 2011 and I took depreciation for $20K. Then in January 2012, I sold the house for $300K. In this case, I will have to report a gain of $45K of which $20K will be depreciation recapture.

Scenario 2.-

How about if I sell the house for only $275K? Then, I will have a gain of $20, all of which will be depreciation recapture. (the end result will be 0 gain and 20K recapture)

Scenario 3.-

How about if I sell the house for $260K then I will have a business loss for gain of 5K and I will recapture depreciation for $5K. Where will my loss go? Where will the rest of my loss go? Well, it went to my pocket in the form of depreciation.

How will I do report those scenarios? You will dispose a rental asset and a personal asset?????

[jainen]

>>I will have to report a gain of $45K of which $20K will be depreciation recapture.<<

What is all this about depreciation recapture? There is NO recapture for residential MACRS on Straight Line. Nothing!

In Scenario One, Pacun, basis for depreciation is the lower of FMV or adjusted basis at conversion. But basis for gain or loss is still the original purchase adjusted for depreciation. If there were a gain, the first $20K would be taxed at a maximum capital gains rate of 25%. Maximum of only 15% for anything above that.

But the original post had just a plain long term capital loss. Probably report as business property on Form 4797, even though it still would have qualified for Section 121 exclusion if there had been a gain.

A better wuestion is whether it was a business loss or non-deductible personal.

[michaelmars]

Jainen - We are all using recapture to mean the 25% rate, thats where the confusion come's in. We aren't talking about ord income recapture. Same as with my post of the other day which you helped on. Your are recaputing the depr since you have to pay taxes on it. I think we all know [although we are incorrect] that when we say recapture we are talking about recouping the deduction.

[jainen]

>>Your are recaputing the depr since you have to pay taxes on it.<<

That is not correct. The depreciation was deducted as ordinary income, It stays that way and is NOT added back. You pay taxes only on the capital gain, if any.

If, for example, listed property falls to 50% or less business usage, you recapture excess depreciation over straight line, by adding it to ordinary income. Additional income equals additional tax. But the original post is about residential rental that used straight line from the beginning, so there is no excess depreciation and nothing is recaptured. You pay taxes only on the capital gain, if any.